Friday, October 05, 2007

What many prospective borrowers don't realize is that the pricing of mortgages and other loans is based in part on their credit-worthiness. Consumers need to be aware of how their credit is evaluated by lenders, and how they can work to avoid so-called "bruised credit" people with a lower credit score can find themselves paying a higher interest rate, or even denied access to certain types of loans.

A credit report is a detailed history of how consistently you meet your financial obligations, and provides a picture of your financial health based on your past behaviour. A credit score is a three-digit number, usually between 300 and 900, representing your overall credit-worthiness, based on personal information from your credit report and other sources.

Both your credit report and score are important. When deciding whether or not to grant a mortgage loan, lenders refer to an applicant's credit report and score, along with a range of other factors such as income, employment history, and size of down payment.

The higher your score the more likely you are to be approved for a mortgage and receive favourable rates because the lender considers you to be a better credit risk. Several factors are used by the two credit agencies in Canada (Equifax Canada and TransUnion Canada) to calculate credit scores:

The consumer hurts their credit score in many subtle ways that they may or may not know about. Everytime they accept the terms when applying for a new credit card their credit score goes down. Each time you fill out one of those forms for 'don't pay for a year' your credit score reduces. Anytime that your credit is 'pulled' your score will decrease. The logic with the lenders is that you must be a poor credit risk if you are shopping around at different financial institutions looking for credit.

I am sure there are other ways of how the consumer can cause their score to drop, but these are the most common.